By Ryan Woo

BEIJING (Reuters). Despite China’s clear call for banks to lower their cash reserves to lend, there are still concerns about imminent policy easing. Economists however warn that credit tightening might not be sufficient to manage the risk of a serious economic downturn.

Since early 2021, the growth rate in the second-largest country has been slowing. Traditional engines like consumption and real estate have slowed. Also, signs are beginning to fade in the export sector, which was once a major driver of growth.

A few economists have even suggested that recent widespread disruptions caused by China’s most severe COVID-19-related outbreak in 2020 and tight lockdown policies has tilted the odds toward a recession.

The State Council or Cabinet stated on Wednesday that all monetary policies tools, including the reductions in banks’ reserve requirement rates (RRRs), must be applied promptly.

After being flagged by State Council, the announcements about the RRR cuts 2021 were made within two to three business days.

Goldman Sachs (NYSE 🙂 said in a note Thursday that “We expect the PBOC will deliver a fifty-basis point reduction in RRR and possibly an interest rate cut within the next few days.”

The majority of private forecasters anticipate an RRR Cut of 50 Basis Points (bps) that would allow banks to access more than 1 Trillion Yuan ($157 Billion) in long-term funding.

The commentary from the state-run Securities Times stated that April 15 was the right window.

China’s March industrial production data and retail sales will be released Monday. They are expected to reveal the effects of COVID curbs.

However, some analysts doubt the effectiveness of cutting RRR now due to lack of credit demand. As factories and businesses stop, consumers are cautious in uncertain economic times. [nL2N2VZ04K

Transmission channels for conventional RRR and rate cuts are severely clogged due to the COVID-related lockdowns and logistics disruptions, according to Nomura.

“When households scramble to stockpile food and private corporates prioritise survivorship over expansion, credit demand is weak,” Nomura analysts said in a note.

“With so many lockdowns, road barricades and property curbs, the most concerning issues lie mainly on the supply side, and merely adding loanable funds and slightly cutting lending rates are unlikely to effectively boost final demand.”

Nomura says China is facing a “rising risk of recession”, with as many as 45 cities now implementing either full or partial lockdowns, making up 26.4% of the country’s population and 40.3% of its GDP.

It expects one 10-bps rate cut each to the rates of the one-year medium-term lending facility (MLF), one-year and five-year loan prime rates (LPRs), and seven-day reverse repo in the near term.

The next MLF is due to mature on Friday.

China has kept its benchmark one-year LPR unchanged at 3.70% and its five-year LPR steady at 4.60% since January.

“But monetary policy is not the panacea for all problems,” the Securities Times commentary said.

“Unblocking supply chains and industrial chains, allowing enterprises to get orders, and allowing people to have income would be the only way the cash-flow of the real economy be improved and a turnaround be achieved naturally.”

($1 = 6.3663 renminbi)